Orient Paper Up on Expected Revenue Rise

Orient Paper preannounces second-quarter earnings and revenue.
Publish date:

(This story updated to add Orient Paper's initial response to Muddy Waters allegations, and Muddy Waters' response to claims it has a subsidiary's name incorrect.)

BAODING, China (


) --

Orient Paper


shares continued to fluctuate wildly, this time trading up on the company's second-quarter preannouncement that it expects a 70.8% jump in revenue.

Orient Paper

said it expects to report second-quarter revenue of $38.3 million, rising from revenue of $22.4 million in the year-ago quarter. The Chinese paper company said it should posted unaudited net income of $5 million, or 28 cents a share, compared with year-ago earnings of $2.5 million, or 20 cents a share. Orient Paper said it would report full financial results for the second quarter on or before Aug. 16.

"Our net income growth was attributable to our strong sales growth and our ability to achieve higher gross and operating margins during the quarter," Orient Paper Chairman and CEO Zhenyong Liu said in a statement. He added that the increase in revenue was due to increased average selling prices and sales volume.

That news sent shares of Orient Paper higher by 23 cents, or 5.3%, to $4.59. Earlier in the session, the stock hit an intraday high of $4.90. More than 849,000 shares changed hands by 12 p.m. ET, compared to the average daily share volume of 860,000.

However, Thursday's gain only retraces some of the previous session's steep 18.7% loss, prompted by a research firm's suspension of coverage on Orient Paper's stock.

Roth Capital Partners analyst Mark Tobin said in a research note Thursday that the firm was suspending research coverage of Orient Paper "pending the results of the company's announced independent third-party investigation and our own independent due diligence."

Until Thursday, Tobin had a buy rating and $16 price target on Orient Paper shares. Roth Capital was the manager of Orient Paper's $24.75 million public offering of 3 million shares of common stock, a transaction that was announced on March 31.

In dropping coverage of Orient Paper, Tobin makes no reference to allegations by a separate research firm against Orient Paper. In late June, Muddy Waters Research alleged in the firm's inaugural research report that Orient Paper is a "fraud" and that the company "overstated its 2008 revenue by 27 times."

Muddy Waters' principals, who are short the stock and would benefit by a decline in its price, cited financial statements by He Bei Oriental Paper Co. Ltd., which it claims is an operating subsidiary of Orient Paper. Muddy Waters also alleges that most of the $31.5 million that Orient Paper raised between October 2009 and May 2010 "has been misappropriated."

Orient Paper said that it "categorically denies these allegations and has instructed its legal counsel to contact Muddy Waters and explore all legal options against it for publishing and distributing such a report."

In addition, Orient Paper claims that Muddy Waters was incorrect in citing financial statements of He Bei Oriental Paper Co. Ltd., and that the company's operating subsidiary is actually named Hebei Baoding Orient Paper Milling Co., Ltd.

Muddy Waters responded that there is no confusion on their part to the name of the company's operating subsidiary. "Our review of our files confirms that we previously studied the correct entity, and thus all of our conclusions in the report are valid," Muddy Waters said in July.

Most recently, Orient Paper said it has retained law firm Loeb & Loeb, which plans to work with its audit committee to retain a Big Four audit firm to conduct an independent investigation into allegations of fraud by Muddy Waters.

Since the first Muddy Waters research note was released on June 28, shares of Orient Paper had lost nearly half their value.

-- Written by Robert Holmes in Boston


Follow Robert Holmes on


and become a fan of TheStreet.com on


Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.